In yet another “consequential loss clause” case that will be of interest to the oil and gas industry, the English High Court confirmed that it would construe such a clause in a manner that assumed that a direct loss of profits was not intended to fall within excluded “consequential loss” unless the clause clearly indicated this was the case.
As a result, the words “Neither party will be liable to the other for any indirect or consequential loss, (both of which include, without limitation, pure economic loss, loss of profit, loss of business, depletion of goodwill and like loss)” were insufficient to exclude a claim for loss of profit directly following from the breach.
In May 2011, Polypearl Limited (“Claimant”) and E.ON Energy Solutions Limited (“Defendant”) entered into two written agreements, a Master Agreement ("Master Agreement") containing general terms and conditions for the supply of certain cavity wall insulation products (the “Products”); and an Insulation Scheme Event Transaction Document ("ISETD").
The Defendant argued that it was not obliged to purchase a set quantity of products under the ISETD and denied that it was in breach of its terms. The Defendant also submitted that, if it was required to purchase that set quantity, the Claimant’s losses were excluded under the Master Agreement, as a loss of profits.
The wording of the relevant exclusion clauses in the Master Agreement stated:
(10.1) "Neither party will be liable to the other for any indirect or consequential loss, (both of which include, without limitation, pure economic loss, loss of profit, loss of business, depletion of goodwill and like loss) howsoever caused (including as a result of negligence) under this Agreement, except in so far as it relates to personal injury or death caused by negligence".
The Court considered that the wording of Clause 10.1 of the Master Agreement in parenthesis was ambiguous since it was not clear whether the wording in parenthesis meant that all loss of profits claims were excluded (whether or not such losses were indirect losses), or whether the wording in parenthesis referred to indirect loss of profits claims only.
However, the Court decided that the words in parenthesis were subordinate to the phrase "indirect or consequential loss" and were not an attempt to place a direct loss in the indirect category since it was very unlikely that businessmen would intend to exclude liability for direct loss and the clause must therefore be construed in accordance with common business sense. Clear words would be required if the parties intended to abandon remedies for all losses (and therefore for any breach of the agreement), and the clause did not clearly indicate this.
The Claimant’s losses of profits were held to be direct losses since such losses were the most obvious losses arising from the Defendant’s breach.
Lessons to Learn
The Courts construe exclusion clauses strictly and absent express wording to exclude a particular type of loss, the Courts will be slow to give an expansive interpretation to an exclusion clause in a contract and will not deem a claim for direct loss of profits to be a claim for indirect loss of profits, unless express wording is included. The case provides further illustration that if the parties intend to exclude claims for a specific type of loss, then this should be very clearly stated within such a clause.
Aficionados of “consequential loss clause” debates will recognise that a similar parenthetical dilemma was resolved in the same manner by the High Court in Markerstudy Insurance Co v Endsleigh Insurance Services  EWHC 281 (Comm).
Interestingly in Glencore Energy UK Ltd v Cirrus Oil Services Ltd  EWHC 87 (Comm) the High Court also recently decided that losses relating to a failure to take delivery of crude under Section 50 of the Sale of Goods Act, were not a “loss of profits” that could be captured by a widely drafted exclusion clause that expressly excluded direct loss of profit. See our previous Law-Now here
For the full case, please click here